A group of banks led by JPMorgan Chase has reduced its credit exposure to the private credit fund FS KKR Capital Corp., co-managed by KKR, just days before KKR announced a $300 million intervention to stabilize the fund. This intervention includes a $150 million equity injection and another $150 million to buy shares from investors wishing to exit.
The credit line was cut by $648 million, approximately 14%, bringing it down to $4.05 billion, with some lenders possibly exiting entirely. The fund has faced significant challenges, with its shares dropping nearly 50% over the past year and trading at a substantial discount to its net asset value.
Moody's downgraded the fund's ratings to junk status in March due to increasing portfolio stress, which has been exacerbated by non-performing loans from companies like Medallia and Affordable Care. In the first quarter, the fund reported losses of $2 per share, totaling around $560 million, and its net asset value fell by about 10%.
FSK President Daniel Pietrzak expressed disappointment over the fund's performance and noted a disconnect between the trading price and intrinsic value. The fund's non-income generating loans increased to 8.1% from 5.5% at the end of the previous year.
Alongside the credit line reduction, the banks raised interest rates on the remaining facility and adjusted the minimum shareholders' equity requirement down to $3.75 billion, indicating lenders' concerns about further asset declines. FSK executives cautioned that individual loans could deteriorate further despite efforts to stabilize the portfolio.
The fund plans to reduce new investments, focus on supporting existing companies, and work towards a less leveraged balance sheet while also initiating a $300 million share repurchase program. KKR has agreed to waive half of its incentive fees for the next four quarters.
FSK, which primarily lends to middle-market U.S. companies, became the second-largest publicly traded business development company after a merger in 2018, with a significant portion of its loans directed towards the software sector